Weekly Fixed Income Summary : February 19 – 23, 2018

Interest Rate Pressures Grow

Outlook. Upward pressure on interest rates still present, but the liquidity released by the recent reserve requirement cut estimated to be worth Php90bn has tempered the rate rise in the belly to the 10-yr; last week the liquid 10-yr (10-61) fell by 79bps week-on-week to 5.86%. Still, the yield curve is projected to grow even steeper ahead of the BSP 25-bp hike likely next month.

Consensus inflation outlook for February is at least 4.5%, up from 4.1% in January, and still past the BSP’s 2%-4% target band on TRAIN’s impact on the general price level.

Market review. The spread between the 10-yr US Treasury (UST) and the 10-yr local benchmark widened to 398bps from 381bps in the prior week as the yield of the former was up by 4bps to 2.94% while the yield of the prior rose faster by 15bps to 6.86% following the release of January Fed meeting minutes which showed a starkly hawkish tone. Yields of ROPs rose by an average of 2bps WoW, tracking the UST rate upticks.

Markets still defensive with thin trading, total daily traded volume up 7% week-on-week (WoW) to Php6.1bn. The yield curve of liquid ISINs was up by an average of 10bps WoW, on rate hike fears both locally and in the US. The front-end (FXTN 05-72: 1yr) was up by 12bps to 2.90%, the belly (FXTN 10-61: 9.7yrs) decreased by 79bps to 5.68%, while the tail (R25-01: 20.5yr) rose by 11bps to 6.56%. Secondary trading was still thin, up by just 7% to Php6.1bn and has been below the Php10bn mark for the third straight week. T-bill trading fell by 68% to Php890mn, the lowest level this year, while T-bond trading slightly picked up by 77% to Php5.2bn. The Bureau of the Treasury (BTr) fully rejected all Php21.3bn worth of bids for its Php20bn T-bill auction on higher-than-expected bid rates.

Emerging Markets’ (EM) 10-year yields flat, up by just 1bp week-on-week (WoW). Yields of EM bonds we follow was almost unchanged, up by just 1bp on average last week, despite the release of a more hawkish Fed minutes. Mexico (10-year yield -8bps), South Africa (-7bps), and Israel (-7bps) outperformed last week, while the Philippines (10-year yield +29bps), Singapore (+15bps), and Indonesia (+9bps) underperformed.

US 10-yr UST up 2bps, WoW. The US Treasury rose by 2bps WoW on average as the 10-yr UST increased to 2.47%, up by 7bps WoW. Minutes of the January Fed meeting were released last Wednesday and were significantly hawkish, with several FOMC members revising more aggresively their economic projections from last December upward. Expectations of further rate hikes (compared to the initially expected 3 hikes this year) intensified as price pressures of shelter, gasoline, clothing and apparel, and medical care emerged more strongly than anticipated. Investors have been watching the inflation picture closely, with worries growing that the Fed may decide to move more quickly than expected if officials deem that policy is too loose for a growing economy. The highlight last week was the US January inflation at 2.1%, faster than the expected 1.9%. Core inflation likewise beat expectations at 1.8% vs 1.7% consensus estimate. Month-on-month growth was also starkly better than expected, growing 0.5% versus consensus of 0.1%.